AN ESSAY ON THE NATURE ftf SIGNIFICANCE OF ECONOMIC SCIENCE phần 5 pdf

54 SIGNIFICANCE OF ECONOMIC SCIENCE OH. can be shown 1 that, during times of inflation, the artificially low rates of interest tend to encourage expansion of certain kinds of capitalistic production in such measure that, when the stimulus is exhausted, it is no longer possible to work them as profitable undertakings. At the same time, liquid resources are dissipated and exhausted. When the slump comes, the system is left high and dry with an incubus of fixed capital too costly to be worked at a profit, and a relative shortage of "liquid capital" which causes interest rates to be stringent and oppressive. The beautiful machinery which so impressed the news- paper correspondents is still there, but the wheels are empty of profit. The material is there. But it has lost its economic significance. Considerations of this sort might have been thought to be very remote from reality at the time of the German inflation or at the time of stabilisation. After years of chronic " capital shortage" in that unhappy country, they begin to appear less paradoxical. 2 4. It is time to return to more abstract considera- tions. We have next to consider the bearing of our definitions upon the meaning of Economic Statistics. Economic Statistics employ two kinds of units of reckoning—physical units and value units. Reckon- ing is by "weight and tale" or by valuation—so many tons of coal, so many pounds sterling worth of coal. From the point of view of economic analysis, what meaning is to be attached to these computations? 1 See Mises, The Theory of Money and Credit, pp. 339-366; Hayek, Monetary Theory and the Trade Cycle, and Prices and Production; Strigl, Die Produklion unier dem Einflusse einer Kreditexpansion (8chriften des Vereins fur Sozialpolitilc, Bd. 173, pp. 187-211). 2 See Bonn, Das Schicksal des äetitscAen Kapitalismus, pp. 14-31. Breaci- ani-Turroni, II Vicendi del Marco Tedesco. in RELATIVITY OF ECONOMIC " QUANTITIES " 55 So far as physical reckonings are concerned, what has been said already is sufficient. There is no need further to labour the proposition that, although, as records of fact, physical computations may be un- impeachable and, in certain connections, useful, yet from the point of view of the economist they have no significance apart from relative valuations. No doubt, assuming a certain empirical permanence of relative valuations, many physical series have direct significance for applied Economics. But from the logical point of view this is an accident. The signifi- cance of the series always depends upon the back- ground of relative valuation. So far as reckonings in terms of value are con- cerned, there are other subtler difficulties which we must now proceed to unravel. According to modern price theory, the prices of different commodities and factors of production are expressions of relative scarcity, or, in other words, marginal valuations. 1 Given an initial distribution of resources, each individual entering the market may be conceived to have a scale of relative valuations; and the interplay of the market serves to bring these individual scales and the market scale as expressed in relative prices into harmony with one another. 2 Prices, therefore, express in money a grading of the various goods and services coming on the market. Any given price, therefore, has significance only in relation to the other prices prevailing at that time. Taken by itself it means nothing. It is only as the expression in money terms of a certain order of pref- erence that it means anything at all. As Samuel 1 See below, Chapter IV., Section 2. a For an exhaustive description of the process, see especially Wicksteed, Commonsense of Political Economy, pp. 212-400. 56 SIGNIFICANCE OF ECONOMIC SCIENCE OH. Bailey pointed out over a hundred years ago, "As we cannot speak of the distance of any object without implying some other object between which and the former this relation exists, so we cannot speak of the value of a commodity, but in reference to another commodity compared with it. A thing cannot be valuable in itself without reference to another thing, any more than a thing can be distant in itself without reference to another thing." 1 It follows from this that the term which, for the sake of continuity and to raise certain definite asso- ciations, we have used hitherto in this chapter, the term "economic quantity" is really very misleading. A price, it is true, expresses the quantity of money which it is necessary to give in exchange for a given commodity. But its significance is the relationship between this quantity of money and other similar quantities. And the valuations which the price system expresses are not quantities at all. They are arrange- ments in a certain order. To assume that the scale of relative prices measures any quantity at all save quantities of money is quite unnecessary. Value is a relation, not a measurement. 2 But, if this is so, it follows that the addition of prices or individual incomes to form social aggregates 1 A Critical Dissertation on Value, p. 5. 2 Recognition of the ordinal nature of the valuations implied in price is fundamental. It is difficult to overatress its importance. With one slash of Occam's razor, it extrudes for ever from economic analysis the last vestiges of psychological hedonism. The conception is implicit in Monger's use of the term Bedeutung in his statement of the Theory of Value, but the main credit for its explicit statement and subsequent elaboration is due to subse- quent writers. See especially Cuhel, Zur Lehre von den Bedürjnissen, pp. 186- 216; Pareto, Manuel d'Economie Politique, pp. 5iO-2; and Hicks and Allen, A Reconsideration of the Theory of Value (Economica, 1934, pp. 51-76). In this important article it is shown how the most refined conceptions of the theory of value, complementarity, substitutability, etc., may be developed without recourse to the notion of a determinate utility function. ra ßELATIVITY OF ECONOMIC " QUANTITIES " 57 is an operation with a very limited meaning. As quantities of money expended, particular prices and particular incomes are capable of addition, and the total arrived at has a definite monetary significance. But as expressions of an order of preference, a relative scale, they are incapable of addition. Their aggregate has no meaning. They are only significant in relation to each other. Estimates of the social income may have a quite definite meaning for monetary theory. But beyond this they have only conventional significance. It is important to realise exactly both the weight and the limitations of this conclusion. It does mean that a comprehensive aggregate of prices means nothing but a stream of money payments. Both the concept of world money income and the national money income have strict significance only for monetary theory—the one in relation to the general theory of in- direct exchange, the other to the Ricardian theory of the distribution of the precious metals. But, of course, this does not exclude a conventional significance. If we like to assume that preferences and distribution do not change rapidly within short periods, and that certain price changes may be regarded as particularly significant for the majority of economic subjects, then no doubt we may assign to the movements of these aggregates a certain arbitrary meaning which is not without its uses. And this is all that is claimed for such estimates by the best statisticians. All that is intended here is to emphasise the essentially arbitrary nature of the assumptions necessary. They do not have an exact counterpart in fact, and they do not follow from the main categories of pure theory. We can see the bearing of all this if we consider for a moment the use which may be made of such 58 SIGNIFICANCE OF ECONOMIC SCIENCE OH. aggregates in examining the probable effects of drastic changes in distribution. From time to time computa- tions are made of the total money income accruing within a given area, and, from these totals, attempts are made to estimate the effects of large changes in an equalitarian direction. The best known of such attempts are the estimates of Professor Bowley and Sir Josiah Stamp. 1 Now, in so far as such estimates are confined to ascertaining the initial amount of spending power available for redistribution, they are valuable and important. And, of course, this is all that has ever been contended by the distinguished statisticians who put them forward. But beyond this it is futile to attach any precise significance to them. For, by the very fact of redistribution, relative valua- tions would necessarily alter. The whole "set" of the productive machine would be different. The stream of goods and services would have a different composi- tion. Indeed, if we think a little further into the problem, we can see that an estimate of this sort must very grossly overestimate the amount of productive power that would be released by such changes. For a substantial proportion of the high incomes of the rich are due to the existence of other rich persons. Lawyers, doctors, the proprietors of rare sites, etc., enjoy high incomes because there exist people with high incomes who value their services highly. Redistribute money incomes, and, although the technical efficiency of the factors concerned would be the same, their place on the relative scale would be entirely different. With a constant volume of money and a constant velocity 1 See Bowley, The Division of the Product of Industry, and Stamp, Wealth and Taxable Capacity. HI KBLATIVITY OF ECONOMIC " QUANTITIES " 59 of circulation, it is almost certain that the main initial result would be a rise in the prices of articles of working-class consumption. This conclusion, which is obvious enough from the census of occupations, tends actually to be concealed by computations in money—pessimistic as these computations are often supposed to be. If we compute the proportion of the population now producing real income for the rich who could be turned to producing real income for the poor, it is easy to see that the increase available would be negligible. If we attempt greater precision by means of money computations, we are likely to exaggerate. And the greater the degree of initial inequality, the greater the degree of exaggeration. 1 5. It is a further consequence of the conception of value as an expression of an order of preference that comparisons of prices have no precise significance, unless exchange is possible between the commodities whose prices are being compared. It follows, therefore, that to compare the prices of a particular commodity at different periods of time in the past, is an operation which, by itself, does not necessarily afîord results which have further meaning. The fact that bread last year was 8d. and bread this year is 6d. does not necessarily imply that the relative scarcity of bread this year is less than the relative scarcity of bread last year. The significant comparison 1 Of course, this is not necessarily so. If, instead of spending their incomes on the expensive services of doctors, lawyers, and so on, the rich were in the habit of spending them on vast retinues of retainers who wert supported by the efforts of others, the change in money incomes might release factors which, from the point of view of the new conditions of demand, represented much productive power. But in fact this is not the case. Even when the rich do support vast retinues of retainers, the retainers spend most of their time looking after each other. Anyone who has lived in a household in which there was more than one servant will realise the force of this consideration. 60 SIGNIFICANCE OF ECONOMIC SCIENCE OH. is not the comparison between 8d. last year and 6d. this year, but the comparison between 8d. and other prices last year and the comparison between 6d. and other prices this year. For it is these relationships which are significant for conduct. It is these relation- ships alone which imply a unitary system of valuations. 1 At one time it used to be thought that these difficulties could be overcome by correcting individual prices for variations in the "value of money". And it may be admitted that, if the relations between each commodity and all the others save the one under consideration remained the same, and only the supply of money and the demand or supply of this particular commodity altered, such corrections would be suffi- cient. If, that is to say, the original price relation- ships were P.=P,=P«=P,=P. (1) and in the next period they were P èP»=iP.=*P,=iP. (2) then matters would be simple, and the comparison would have some meaning. But such a relationship is 1 On all this, the classical discussion is still to be found in Samuel Bailey's chapter (op. cit., pp. 71-93) "On comparing commodities at different periods". Bailey overstates his case to this extent, that he does not mention prospective value relations through time (see below, p. 61). But in every other respect his position is unassailable, and his demonstrations are among the most elegant to be found in the whole range of theoretical analysis. Even the most blase could scarcely resist a thrill at the exquisite delicacy of his exhibition of the ambiguities of the first proposition of Ricardo's Principles. £t was one of the few real injuries done to the progress of Economic Science by the solidarity of the English Classios that, presumably because of its attacks on Ricardo and Malthus, Bailey's work was allowed to drop into neglect. It is hardly an exaggeration to say that the theory of index number is only today emancipating itself from errors into which a regard to Bailey's main proposition would effectively have prevented it from falling. m RELATIVITY OF ECONOMIC " QUANTITIES " 61 not possible save as a result of a series of compensatory accidents. This is not merely because demand or the conditions of production of other commodities may change. It is because almost any conceivable change, either real or monetary, must bring about different changes in the relation of a particular good to each other commodity. That is to say, save in the case of a compensatory accident, any change will lead not to a new set of relationships of the order of equation (2), but rather to a set of relationships of the order P„=ÌP„=iP„=fP.=P (3) It has long been recognised that this must be the case with real changes. If the demand for a changes, it is most improbable that the demand for b, c, d, e . . . will change in such a way that the change in relation between a and b will be equivalent to the change in relation to b and c . . . and so on. With changes in technique, factors of production which are released from the production of a will not be likely to be distributed between b, c, d in such proportions as to preserve P 6 : P c : : P„ : P á . . . But, as may be demonstrated by very elementary reasoning, 1 the same is true of "monetary" changes. It is almost impossible to conceive a "monetary" change which does not affect relative prices differently. But, if this is so, the idea of precise "correction" of price changes over time is illusory. 2 Samuel Bailey's conclusion remains: "When we say that an article in a former 1 See especially Hayek, Prices and Production, oh. iii. 2 It is not always realised that the difficulty of attaching precise meaning to the idea of changes in value, if there are more than two commodities and the ratios of exchange between one and the rest do not move in the same proportion, is not limited to the idea of changes in the "value of money". The problem of conceiving changes in the "purchasing power" of pig iron is just as insoluble as the problem of conceiving changes in the purchasing power of money. The difference is a practical one. The fact that 62 SIGNIFICANCE OF ECONOMIC SCIENCE OH. age was of a certain value, we mean that it exchanged for a certain quantity of some other commodity. But this is an inapplicable expression in speaking of only one commodity at two different periods." 1 It is important to realise the exact significance of this proposition. It does not deny the possibility of intertemporal price relationships. Quite clearly, at any moment, anticipations of what prices will be at a future period inevitably influence present valuations and price relationships. 2 It is possible to exchange goods now for goods in the future, and we can conceive an equilibrium direction of price change through time. This is true and important. But while there is and must be a connection between present prices and anticipations of future prices, there is no necessary connection or significant value relationship between present prices and past prices. The concep- tion of an equilibrium relationship through time is a hypothetical relationship. It is realised only in so far as anticipations are proved to have been justified. Through history, the data change, and though at every moment there may be tendencies towards an equili- brium, yet from moment to moment it is not the same equilibrium towards which there is movement. There is a fundamental asymmetry in price relationships through time. The future—the apparent future, that is to say—affects the present, but the past is irrelevant. The effects of the past are now simply part of the data. production is determined by relative valuations makes it unnecessary for practical purposes to worry about changes in the purchasing power of pig iron, while for all sorts of reasons, some good, some bad, we are obliged to worry a good deal about the effects of "monetary" changes. 1 Op. cü., p. 72. 2 See Fetter, Economic Principles, p. 101 ff„ and pp. 235-277. See also Hayek, Das interiemporàU Glek,hgewichtsysUm der Preise und die Bewegungen its "Qeldwerles`` (Wellwirtschaftliches Archiv, Bd. 28, pp. 33-76). m RELATIVITY OF ECONOMIC " QUANTITIES " 63 So far as the act of valuation is concerned, bygones are forever bygones. Here, again, as in the case of our considerations regarding aggregates, there is no intention of denying the practical utility and significance of comparisons of certain prices over time, or of the value of "correc- tions" of these prices by suitably devised index numbers. It is not open to serious question that for certain questions of applied Economics on the one hand, and interpretation of history on the other, the index number technique is of great practical utility. Given, a willingness to make arbitrary assumptions with regard to the significance of certain price sums, it is not denied that conclusions which are important for practice may be reached. All that it is desired to emphasise is that such conclusions do not follow from the categories of pure theory, and that they must necessarily involve a conventional element depending either upon the assumption of a certain empirical con- stancy of data 1 or upon arbitrary judgments of value with regard to the relative importance of particular prices and particular economic subjects. 6. The interpretation of economic statistics is not 1 As in discussions of changes in real income and the cost of living. On all this see Haberler, Der Sinn der Indexzahlen, passim. Dr. Haberler's con elusion is definitive. "Die Wissenschaft macht sich einer Grenzüberschrei- tung schuldig, sie fällt ein Werturteil wenn sie die Wirtschaftsubjekte belehren will welches von zwei Naturaleinkommen daa 'grössere' Realein- kommen enthält. Darüber zu entscheiden, welches vorzuziehen ist, sind einzig und allein die Wirtschafter selbst berufen." p. 83 ("Soience is guilty of trespassing beyond its necessary limits—that is to say. it is delivering a judgment of value—if it attempts to lay down for others which of two real incomes is the 'larger'. To decide on this, to decide which real income is to be preferred, is a task which can only be done by him who is to enjoy it— that is, by the individual as 'economic subject'". The translation is very free, for there is no English equivalent to the very useful German contrast between Naturaleinkommen and Sealeinkommen unless we use "Real income" as equivalent to Naturaleinkommen and Fetter's "Psychic income" for the German Sealeinkommen). [...]... pure analysis and adopt any of the conventional assumptions of applied Economics, we know just where we are We are never in danger of asserting as an implication of our fundamental premises something which is smuggled in on the way by means of a conventional assumption We may take as an example of the ad-vantages of this procedure the modern treatment of organisation of production The old treatment of. .. questions, especially that relating to personal distribution, is another matter (see Cannan, Economic Outlook, pp 2 15- 253 , and Review of Economic Theory, pp 284-332; see also Dalton, Inequality of Incomes, pp 33- 158 ) The point is that they thought they ought to answer them The fact that they did not is not necessarily to the discredit either of economists or their generalisations There is strong reason...64 SIGNIFICANCE OF ECONOMIC SCIENCE OH the only department of economic studies to be affected by this conception of our subject-matter The arrangement and elaboration of the central body of theoretical analysis is also considerably modified This is an interesting example of the utility of this kind of investigation Starting from the intention to state more precisely the subject of our generalisations,... the point of view of the history of theoretical Economics, the central achievement of his book was his demonstration of the mode in which the division of labour tended to be kept in equilibrium by the mechanism of relative prices—a demonstration 1 See Pareto, Manuel d`E¢onomie Politique, p 147 ; also my article on Production in the Encyclopaedia of the Social Sciences In the first edition of this essay. .. distribution of wealth.1 Economics has been divided into two main divisions, the theory of production and the theory of distribution, and the task of these theories has been to explain the causes determining the size of the "total product" and the causes determining the proportions in which it is distributed between different factors of production and different persons There have been minor differences of content... tended more and more to abandon the traditional arrangement We no longer enquire concerning the causes determining variations of production and distribution We enquire rather concerning the conditions of equilibrium of various economic "quantities",2 given certain initial data, and we enquire concerning the effects of variations of these data Instead of factors in a fixed material environment In fact,... questions of economics are why all of us taken together are aa well off as we are and why some of us are much better off and others much worse off than the average " (Cannan, Wealth, 3rd edition, p v) 2 m RELATIVITY OF ECONOMIC " QUANTITIES " 65 questions in which we are interested from the point of view of social policy are—or at any rate appear to be —questions relating to production and distribution... early in the literature of scientific Economics Quesnay's Tableau Economique was essentially an attempt to apply what is now called equilibrium analysis And, although Adam Smith's great work professed to deal with the causes of the wealth of nations, and did in fact make many remarks on the general question of the conditions of opulence which are of great importance in any history of applied Economics,... Professor Schumpeter, a sense almost of shame at the incredible banalities of much of the so-called theory of production the tedious discussions of the various forms of peasant proprietorship, factory organisation, industrial psychology, technical education, etc., which are apt to occur in even the best treatises on general theory arranged on this plan.2 1 Whether their generalisations did answer the. .. School of Lausanne The theory of value and distribution was really the central core of the analysis of the Classics, try as they might to conceal their objects under other names And the traditional theory relating to the effects of taxes and bounties was always couched in terms thoroughly consistent with the procedure of modern comparative statics Thus, though the appearance of modern theory may be . with the causes of the wealth of nations, and did in fact make many remarks on the general question of the conditions of opulence which are of great importance in any history of applied Economics,. greater the degree of exaggeration. 1 5. It is a further consequence of the conception of value as an expression of an order of preference that comparisons of prices have no precise significance, unless. relationships between men and economic goods; and we ask under what condi- tions these relationships are constant and what are the effects of changes in either the ends or the means between which they